Almost a quarter of tickets for air travel in Asia are now sold by low-cost carriers as deregulation and competition hot up, Chris Pritchard reports
A lunch-hour stroll through KLIA1 and KLIA2, two airport terminals in Kuala Lumpur, Malaysia’s capital, says much about trends in Asian aviation. KLIA1 is the original terminal of the country’s showpiece international airport, opened 19 years ago. It is where passengers for the major airlines arrive and leave, but it is far less busy than KLIA2, only three years old. That is dedicated to the budget airlines that are booming across much of Asia.
Aviation analysts calculate that almost a quarter of ticketsfor Asian air travel involve low-cost carriers, or LCCs, as budget airlines are known in the region. While India and China, despitefast growth, remain highly regulated markets, LCCs have captured as much as 60 per cent of business in some other countries, particularly those in South-East Asia.
Malaysia is both the pioneer and leader in this form of travel. At KLIA2,the fast-growing Air Asia group accounts for more than 90 per cent of traffic. The original Air Asia, based in Malaysia, still thrives, but has spawned jointventures in neighbouring countries. Their aircraft display similar red liveries, often emblazoned with the slogan ‘Now everyone can fly’.
The man behind Air Asia’s success is a 53-year-old father of two named Tony Fernandes,previously amusic industry executive who dreamed of startingan airline. But the Malaysian Prime Minister at the time, Mahathir Mohamed, advised him to buy an existing carrier, and Fernandes – who also controls an international budget hotel chain and other businesses – picked up an ailing airline for anominal one ringgit (equivalent then to 26 US cents).
Industry wisdom was that Fernandes was doomed to failure. Instead, Air Asia madehealthy profits within two years. The key was Fernandes’sappreciation of how price-sensitive the market could be. While executives of some airlines seek to compete on luxury rather than price, Fernandes concentrates on luring customers who previously would not have considered flying.
A colourful character,Fernandes is very much the public face of Air Asia, happily posing for souvenir pictures with passengers in arrivals and departure halls. He is often compared to Britain’s Richard Branson, another entrepreneur who loves to promote himself while publicising his Virgin Airlines, and numerous other businesses carrying the Virgin label. The two are close friends: when Fernandes persuaded Branson to take a bet with him on their respective Formula 1 motor-racing teams, the bearded Briton lost. His forfeit was to shave his legs, dress up as an air stewardess (a familiar pose for Branson, who often wears drag to market his ventures, including a short-lived foray into wedding gowns) and serve passengers on an flight of Fernandes’s Air Asia X, the long-haul arm of Air Asia, which flies to a dozen countries.
These days Air Asia has a Malaysia-based fleet of 81 aircraft, on top of those used by Air Asia X, with many owned rather than leased. There arejoint ventures bearing the Air Asia name in India, China,Vietnam and the Philippines, along with Thailand and Indonesia, which also have Air Asia X airlines. Among their competitors are Cebu Pacific (already bigger than the flag carrier, PhilippineAirlines), Singapore Airlines’ subsidiary, Scoot,and China’s Spring Airlines and 9Air.
Spring Airlines flies internationally to Japan, typically offering fares around 30 per cent lower than its rivals. But the growth of Chinese budget airlines is slowed by government regulations and strong lobbying by the country’s dominant airlines. They presently have only seven per cent of the market, according to the Centre for Asia Pacific Aviation, compared with close to 60 per cent in Thailand and Indonesia, the most profitable locations for budget airlines after Malaysia. They also face stiff competition from high-speed trains and even buses, which have become more comfortable while remaining cheap.
Bullet trains have also hampered the growth of budget airlines in Japan, where one of the two main airlines, All Nippon Airways, has two low-cost subsidiaries, Peach Aviation and Vanilla Air. Other obstacles include high cost structures, limiting discounts, and short distances, which can make train travel faster compared with the time taken to get to and from airports. After differences with its joint venture partner, Air Asia closed briefly in Japan before finding a new partner
Not so long ago, India had two state-controlled airlines – Air India for long-haul travel, Indian Airlines for domestic and regional flights. How that has changed: independent IndiGo has recently become Asia’s top airline in terms of passenger numbers, surpassing Indonesia’s Lion Air Group. Air India now has its own low-cost subsidiary, Air India Express. Regulation and other impediments remain, though they are expected to ease, and India’s burgeoning budget sector is widely forecast to accelerate.
It certainly hasn’t been plain sailing in India so far, however, with the spectacular collapse of Kingfisher Airlines often cited. Even Air Asia India, despite the parent group’s undeniable know-how in the budget sector, struggled before finding a formula for profitable growth, for which hopes are now high.
But in general, budget air travel is booming across the region, including the Australian and New Zealand market. Qantas-owned Jetstar, domestic but with several major long-haul routes, is highly successful. So, on a smaller scale, is Tigerair. It is owned by Virgin, Australia’s other major domestic carrier. Vietnam’s Vietjet not only flies domestically, but is now a familiar sight across South-East Asia. South Korea’s Air Busan, Jeju Air and Jin Air are also successful, though small. Even in tiny East Timor, Asia’s newest nation, which doesn’t have an airline, there is talk of a low-cost start-up.
Throughout Asia, however, planners look to Malaysia, where it all began. There, Air Asia has a healthy 36.1 per cent market share, to which can be added Air Asia X’s 8.66 per cent. By contrast, the flag carrier, Malaysia Airlines, has a mere 23.6 per cent. Air Asia X grew passenger numbers by an impressive 46 per cent last year.
Since price-per-kilometre is what counts in low-cost air travel, ancillary charges are extremely important. Passengers usually pay extra for baggage, meals, blankets and to select seats. Sometimes entertainment has pay-per-view components. One budget carrier pre-checks a box so passengers accept insurance, for which it is a reseller. But Bill Franke, co-founder and managing partner of Arizona-based private equity firm Indigo Partners, which has been deeply involved in the aviation sector, believes there’s still a gap in Asia’s fast-growing budget market for airlines with even fewer frills.
According to Will Horton, an analyst at the Centre for South Pacific Aviation, an aviation intelligence company,success in some places willtake longer than some experts believe.One example is China, where Horton argues that regulatory and other hurdles mean it will take AirAsia ‘a long time to build up and achieve its goals’.
But such countries are likely to be an exception. As Asians increasingly use low-cost carriers,relying on governments to supply the necessary infrastructure, it is difficult to foresee overall growth slowing.